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RISK-BASED REGULATIONFRAMEWORK

Consultation Document

Financial Services Commission of OntarioMarch, 2011

Risk Based Regulation Framework

March 8, 2011 of 50Financial Services Commission of Ontario

Table of Contents

Executive Summary .......................................................................................................................................3

Consultation Questions .................................................................................................................................5

1. Introduction.......................................................................................................................................8

1.1 Background................................................................................................................................8

1.2 Objectives................................................................................................................................10

1.3 Design Principles .....................................................................................................................11

2. The Proposed Framework ...............................................................................................................12

2.1 Regulatory Response Model ...................................................................................................13

2.2 Risk Universe ...........................................................................................................................16

2.3 Risk Indicators .........................................................................................................................19

2.4 Detailed Risk Assessments ......................................................................................................21

2.5 Regulatory Powers and Tools ..................................................................................................22

2.6 Data Sources............................................................................................................................24

2.7 Process Overview ....................................................................................................................27

3. Medium Term Strategy ...................................................................................................................31

3.1 Framework Transition .............................................................................................................32

3.2 Stakeholder Education and Engagement ................................................................................33

3.3 Quality Control and Framework Maintenance........................................................................35

Appendix - Illustrations of Detailed Risk Assessment ..................................................................................36



Executive Summary

This document describes a broad-based framework proposed by the Financial ServicesCommission of Ontario (FSCO) for the risk-based regulation of pension plans in Ontario. Thepurpose of introducing this framework is to improve FSCO’s overall effectiveness in itsmonitoring of key pension risks, and to ensure appropriate regulatory response is taken by FSCOto address risk situations, thereby better protecting the interests of pension plan beneficiaries.It also serves in part to address the Ontario Expert Commission on Pensions’ recommendationsin regard to FSCO, which are contained in a report entitled A Fine Balance – Safe Pensions,Affordable Plans, Fair Rules.

Our proposed framework is grounded on the following five principles:

Proactive – We will take proactive measures to promote compliance and to reduce risksto plan beneficiaries;

Focused – We will focus our attention on those plans posing the most serious risks tothe security of plan beneficiaries’ benefits;

Proportionate – Our regulatory response will be proportionate to the risks identified,with due regard to the probability and impact of risk, and we will intervene on a specificbasis only when necessary;

Consistent – We will apply our approach consistently and in a way that minimizesuncertainty about our likely response; and

Informed – Our assessment of risk and regulatory response will be informed by theevidence gathered from appropriate sources.

In addition, our approach is building on existing risk-based processes that have proven to beeffective. The risk-based approach as proposed in this consultation document will apply to anyOntario registered pension plan that provides either defined benefit (DB) or definedcontribution (DC) benefits, or both.

The core of the framework is a Regulatory Response Model, which includes a trigger mechanismbased on readily available information and supported by a plan specific assessment process toidentify plans posing the greatest risks. Both the likelihood and impact of risk are taken intoaccount in the assessment process. As well, a certain degree of judgment will be requireddepending on the nature of the risks being assessed.



In designing the trigger mechanism and assessment process, we intend to focus initially on fiverisk areas, namely:

funding risk,

investment risk,

administration risk,

governance risk, and

sponsor/industry risk.

Once a plan is judged to pose a high risk, we would look carefully at the circumstances of theplan before deciding on the appropriate regulatory actions to take, which may includeprosecution under the Pension Benefits Act.

The following chart depicts the Regulatory Response Model.

The proposed framework is a significant change to the way in which FSCO regulates. The fullimplementation of the framework will take time and flexibility will need to be built intotransition plans as implementation is phased in. We plan to carry out over the next three yearsthe following activities:

1. Enhance existing risk-based processes - integrating the monitoring and review of fundingand investment risks; adding other risk factors (e.g., late filings, stakeholder complaints)to the trigger mechanism; strengthening site examinations.

2. Enhance stakeholders’ understanding of FSCO’s risk-based approach.3. Establish a quality control and maintenance process.



Consultation Questions

FSCO would like to hear from administrators and other interested stakeholders on the risk-basedregulation framework (Framework) proposed in this document. We welcome comments on thefollowing:

General questions1. Do you agree with FSCO’s overall approach to risk-based regulation?2. Do you think that the proposed Framework will help FSCO more effectively regulate

registered pension plans?

Specific questions

Section 1 sets out the objectives for FSCO’s risk-based regulation of pensions and the designprinciples in creating the Framework.

3. Do you agree with the design principles on which the Framework is based?

Section 2 gives an overview of the Regulatory Response Model, describes the risk universeand risk assessment methodology, identifies the data sources and regulatory tools necessaryto assess risks and to carry out the regulatory response, and describes the regulatoryprocess flow.

4. Do you agree that the Regulatory Response Model is an appropriate way to regulate pensionplans and to guide regulatory response actions?

5. Are the risk universe and related risk indicators appropriate for risk assessment purposes?Are there any other risk indicators that should be taken into account?

6. Have we identified the right data sources and regulatory tools in support of the Framework?Are any data unnecessary or too difficult to obtain? Are there any additional data we shouldcollect and use?

7. Do you have any comments on the regulatory process flow and the related businessprocesses?

Section 3 outlines the principal activities FSCO plans to carry out over the next three yearsfor transition to the Framework.



8. Do you consider the transition plan reasonable, in the light of FSCO’s regulatory capacity andthe stakeholders’ expectation?

9. Do you agree that the proposed stakeholder education and engagement activities wouldenhance stakeholders’ understanding of FSCO’s risk-based regulation approach?

How to Provide CommentsFSCO welcomes comments regarding this consultation document. There are several ways tosubmit your comments.

1) You may send your comments by email to: [email protected]. Please includein the subject line of your email “Risk- Based Regulation Framework.”

2) You may mail your comments to:Attention: Tim Thomson, Project ManagerFinancial Services Commission of Ontario5160 Yonge Street, Box 85Toronto ON M2N 6L9

Please include a subject line in your letter referencing “Risk Based RegulationFramework.”

3) You may send your comments by fax to (416) 226-7787. Please include a subject line inyour fax referencing “Risk-Based Regulation Framework.”

If you need clarifications on the technical aspects of the proposed Framework prior tosubmitting your response, please contact either:

George Ma, Chief ActuaryTel: (416) 226-7785Email: [email protected]

or

Lester Wong, Senior Actuarial ConsultantTel: (416) 226-7784Email: [email protected]



Please note that we may publish the feedback you send us as part of our response to theconsultation. If you wish your comments to remain anonymous, please state this explicitly inyour response.

If you wish your response to be kept confidential, please state so and we will take the necessarysteps to meet your request. However, please be aware that, should we receive a formal requestunder Freedom of Information legislation, we may be required to make your response available.

When responding, please advise whether you are responding as an individual or on behalf of anorganization. If responding on behalf of an organization, please specify the organization.

Closing dateThis consultation document was published on March 8, 2011. The closing date for responses tothis consultation is April 7, 2011.



1. Introduction

1.1 Background

Over the past decade pension regulators around the world have been moving towards risk-based regulation. This trend has been sparked by a desire to address funding issues, as well as topromote good governance and risk management practices, in recognition that pure complianceapproaches are limited. As an initial step, FSCO has instituted processes addressing funding andinvestment risk.

The Ontario Expert Commission on Pensions recommended in its report A Fine Balance – SafePensions, Affordable Plans, Fair Rules that FSCO should:

Develop a program of proactive monitoring, auditing, inspections and investigationsdirected especially at plans whose profiles, sponsors’ profiles or sectoral location suggestthat they may be at risk of failure or of significant under-funding.

Expand and update its existing systems for monitoring risks, ensure that these systemsare designed and administered by expert staff, and supplement them with otherstrategies for detecting plans at risk.

Be empowered to undertake remedial measures based on the results of its proactivemonitoring.

Furthermore, FSCO’s assessment is that:

Current pension regulatory programs at FSCO may not identify all key risks inherent inpension plans and may not adequately protect the interests of pension planbeneficiaries. FSCO pension resources can be allocated more effectively to addresspension plan risks.

Through the expansion and enhancement of its existing risk-based monitoring programs,FSCO could better monitor primary pension risks, and ensure appropriate steps aretaken to address non-compliance and risk taking without proper risk governance,thereby better protecting the interests of pension plan beneficiaries.

With access to consolidated data and information collected from stakeholders and otheravailable sources, and the provision of sufficient regulatory authority and resources,FSCO would be equipped to address non-compliance and to mitigate potential risk topension plans and their beneficiaries in a more timely, effective and efficient manner.



A project to enhance risk-based regulation was established by FSCO in 2009, in response to theOntario Expert Commission on Pensions Report that recommended, inter alia, developing aprogram of proactive monitoring of pension plans and updating systems and processes to detectplans at risk.

The Framework as proposed in this document builds on the existing risk monitoring programsthat have proven to be effective and considers a broader universe of pension plan risks includingthose related to administration, governance and sponsor related risks.

The Framework provides for a base level of regulation across all pension plans includingmonitoring of key risk indicators, improved dialogue with pension stakeholders, and promotionof best practices. Above this base level, the Framework directs resources to those plans that areexposed to or exhibit greatest risks. It is expected that this approach would help FSCO moreeffectively monitor and manage the risk of pension plan failure and optimizes its use ofregulatory resources.

The Framework presented herein is based on consideration of the pension plan environment inOntario, the current regulatory activities of FSCO’s Pension Division, as well as leading practicesin risk-based regulation that have been adopted by The Pensions Regulator in the UnitedKingdom, the Australian Prudential Regulation Authority, the De Nederlansche Bank in theNetherlands, and the Office of the Superintendent of Financial Institutions of Canada.



1.2 Objectives

The objectives for FSCO’s risk-based regulation of pensions are set out below:

Regulation should enhance the security of plan beneficiaries’ benefits.

Regulation should reduce the risk of situations which may lead to calls on the PensionBenefits Guarantee Fund (PBGF).1

Regulation should ensure compliance with the law, in particular ensuring FSCOdischarges its responsibilities set out in the Pension Benefits Act.

Regulation should encourage sponsors and plan administrators to adopt goodgovernance, risk management and business practices.

These objectives are broadly consistent with those observed at peer regulators. The risks thatare addressed on the basis of the above objectives are defined by the Risk Universe containedwithin the Framework.

1 It should be noted, however, that we do not regard our objective of reducing the risk of situations which may lead to calls on

the PBGF as meaning that this risk should, or could, be reduced to zero. As the causes of calls on the PBGF are very diverse,particularly those related to employer insolvency, it is not possible for the regulator to achieve this outcome. In addition, FSCOneeds to balance the extent of its regulatory oversight with the administrative burdens put on the plan sponsors.



1.3 Design Principles

In designing the Framework, a number of key principles have been considered. These designprinciples assist in creating a framework that is consistent with the risk-based regulationobjectives and recognize FSCO’s current resources, activities and plans. The key principles are asfollows:

Proactive – The Framework should entail proactive measures to promote compliance and toreduce risks to plan beneficiaries, recognizing that prevention is better than cure.

Focused – The Framework should encourage a focus on the appropriate risk areas, minimizeside effects, and ensure resources are targeted towards plans and areas of higher risk.

Proportionate – The Framework should enable FSCO to plan its regulatory activitiesproportionate to the risk involved. This includes use of high impact regulatory tools towardsareas of higher risk and intervention only when necessary.

Consistent – The approach applied within the Framework should be consistent and in a waythat minimizes uncertainty about our likely response.

Informed – Risk assessment and our regulatory response should be informed by theevidence and due attention should be paid to emerging risks.

In addition, FSCO already has some risk-based monitoring processes that have proven to beeffective and these would be built upon.



2. The Proposed Framework

The following chart depicts the component parts of the Framework. The key elements of theFramework are described more fully in the balance of this document.

Figure 2.1



2.1 Regulatory Response Model

The Regulatory Response Model, illustrated by the diagrams in this section (Figures 2.2 – 2.4),lies at the core of the Framework. The diagrams summarize our approach to prioritizingregulatory work according to risk. Both the probability and the impact of risk are taken intoaccount in determining FSCO’s level of response in specific cases.

The Framework envisages that the model will be used to assess plan and transaction risks on anongoing basis. Plans and transactions will be classified within the model depending on their riskcharacteristics. Consideration of the risk universe and related risk indicators should be made indetermining the quadrant into which a plan or transaction falls.

The model provides for a base level of regulation across all pension plans including a focus onindustry education, promotion of best practices and monitoring of risk indicators. Above thisbase level, the model directs resources to those plans that are exposed to or exhibit greaterrisks. It is expected that this approach would help FSCO more effectively manage the risk ofpension plan failure and optimize the use of regulatory resources.



Figure 2.2

Figure 2.3



Figure 2.4



2.2 Risk Universe

The proposed risk universe is intended to capture broadly the risks inherent in pension plans.Risk indicators for key risks will be developed and tracked for all plans. They are used asguidance when applying the Regulatory Response Model and in performing more detailed riskassessments. While it describes the various risks that could potentially be considered, judgmentwill be applied to determine what risks to review in specific cases and to what extent.

It is recognized that some of the risks will be more challenging to assess than others. In somecases, the tools or information to make meaningful assessments of specific risks are notcurrently available. Therefore, more emphasis will be given to those risks in the universe forwhich meaningful and relevant assessments can be made.

The Framework envisages that detailed risk assessments will be performed primarily on plansidentified to be high risk. However, detailed risk assessments will also be performed on otherplans periodically as part of the quality control process to ensure that the Framework remainseffective.

The risk universe focuses on risks within pension plans. The following is a suggested riskuniverse categorization:

Funding Risk

Investment Risk

Administration Risk

Governance Risk

Sponsor/Industry Risk

Definitions and examples of risk considerations for each category are set out in Table 2.1 below.



Table 2.1

Risk Area Example Inherent Risk Considerations

Funding RiskThe risk to member benefits posedby shortfalls in plan funding

• Appropriateness of actuarial assumptions and methods used invaluations

• Plan solvency per actuarial reports and internal (FSCO)estimates

• Timeframe for plan recovery• Late or unremitted contributions

Investment RiskThe risk of exposure to changes inthe value of plan assets thatsupport the plan liabilities

Market Risk (exposure to changes in market prices)• Volatility of investment products• Complexity and liquidity of investments

Matching Risk (risk of mismatch between assets and liabilities)• Difference in average duration between assets and liabilities• Classes of investments held vs. liabilities for active / retired

members

Credit Risk (risk of counterparty failing to meet obligations)• Credit quality of assets

Administration RiskThe risk associated with inefficientor insufficiently effectiveprocesses or organization in theadministration of the plan

• Benefit processing (accuracy, timeliness and communication)• Complex plan arrangements• Recordkeeping procedures• Errors / complaints: Frequency and response effectiveness• Late filings / errors in filings• Multi-jurisdictional plans• Regulatory compliance

Note: Some aspects can only be assessed through planexamination



Table 2.1

Risk Area Example Inherent Risk Considerations

Governance RiskThe risk associated with lack of orpoor governance practices

• Existence of code of conduct / policies and procedures• Use of qualified outsourced providers and oversight by the plan

administrator• Existence of oversight / monitoring / supervision policies and

evidence that policies are followed (i.e. internal controls)• Information, performance measures and risk management

processes

Note: Some aspects can only be assessed through planexamination

Sponsor/Industry RiskThe risk of sponsor insolvency orpotential adverse financial impactdue to industry-wide events

• Continuity / financial strength of pension plan sponsor• Business outlook of Industry sector; industry reports• Mergers / acquisitions /Downsizing



2.3 Risk Indicators

The Framework recommends that risk indicators be developed consistent with the risk universe.When developing risk indicators, consideration should be given to the following:

FSCO’s ability to obtain, track and report on the risk indicator;

The ability to leverage current processes and information tracked by FSCO;

The relative importance of the risk indicator in identifying plans at risk;

The total number of risk indicators – including consideration that too many indicatorscan reduce the usefulness of the indicator concept as it can be difficult to assess whichindicators are relevant for which plan.

The Framework recommends that a tool be developed to present the risk indicators throughtaking quantifiable / measurable risk-based metrics and presenting these in an appropriateformat. The appropriate format will be one that can be supported by FSCO’s IT system and thatpresents the indicators clearly and concisely (e.g. on one page / screen, such as a dashboardformat).

The primary purpose of the risk indicator tool is to provide an initial pre-screening to establish apreliminary assessment within our Regulatory Response Model. The tool will highlight potentialkey risk areas for further analysis, and supports staff in the next level of review within theFramework.

The risk indicator tool will likely include indicators that can be automated and others wheremanual input is required. For example, funding risk and investment risk indicators can build onthe data collected in the AIS and IIS filings and for which we have already established some risk-based monitoring processes. These existing processes can be used (perhaps with modifications)to provide the risk indicator ratings in an automated fashion. Other indicators, such as sponsorspecific risks, may be identified through manual processes such as media searches.

The risk indicator tool can be implemented initially based on information currently available inour database. Over time, the risk indicators to include in the tool will be refined based onavailability of information as well as our experience with each indicator’s effectiveness insatisfying the main purpose of the tool.

Indicators to consider for initial implementation are shown in Table 2.2 below.



Table 2.2

Risk Category Risk Indicator Potential Rating Method

FundingFlags based on AIS data

System rule based on AIS process (e.g. plansolvency, actuarial assumptions, actuarialgains/losses, demographics, etc.)

Late or unremitted ContributionsSystem rule based on frequency, tardiness andsize of late contributions

Investment Flags based on IIS dataSystem rule based on IIS process (e.g. regulatorybreach, investment performance, asset/liabilitymismatch, etc.)

Administration Late FilingsSystem rule based on frequency and lateness oflate filings

ComplaintsSystem rule based on number and severity ofcomplaints

Non-compliance Manual input

Complexity of plan structure Flag based on existing data

Multijurisdictional plan Flag based on existing data

Benefits processing Manual input based on plan examination results

Governance

Plan type Flag based on existing data

Audit ReportManual input based on issues identified in auditreport

Policies and procedures Manual input including plan examination results

Sponsor/Industry

Industry outlook Manual input

Mergers/acquisitions/downsizing Manual input

Sponsor insolvency Manual input



2.4 Detailed Risk Assessments

As discussed earlier, detailed risk assessments are recommended for plans or transactionsdesignated as higher risk through the Regulatory Response Model, as well as other plans on aselective basis. Such risk assessments can provide the following benefits:

More comprehensive approach whereby staff more fully consider the risks faced by theplan, taking into account the plan’s specific circumstances;

Confirm or otherwise modify initial risk assessment provided mainly by system-basedapproach;

Risk factors are not considered in isolation, but rather a “holistic” approach is taken toobtain a more complete picture of the risks involved;

The documentation of risks assists in developing appropriate regulatory responses;

Ability to track how risks are changing over time and highlights new risks;

The process can identify plans that are no longer high risk;

Risk assessment provides direction and focus to the plan examination process;

The documentation allows for ex-post reviews of the risk assessment process and riskuniverse, assisting in future improvements to the regulatory approach.

Detailed risk assessments are intended for internal purposes only and would be used as a tool toguide regulatory action or dialogue. While there will be some structure in performing detailedrisk assessments, they will be customized as needed to fit the particular circumstances of theplan or transaction being reviewed. It does not result in a standardized report.

In performing the detailed risk assessment, the elements from the risk universe will beprioritized based on what is deemed most relevant as well as the availability and quality ofinformation. It is unlikely that all elements of the risk universe would be considered in anyparticular case.

It is intended that material concerns and issues arising from the detailed risk assessments wouldbe communicated and shared with the plan administrator. This provides an opportunity for theadministrator to address these concerns and issues through constructive dialogue. Furtherregulatory action, if any, would be guided by the outcome of such a process.

Please see Appendix for illustrations of what a detailed risk assessment might entail.



2.5 Regulatory Powers and Tools

Regulatory tools are generally set out in legislation but can also include actions taken by theregulator to influence through moral suasion (e.g. stakeholder communication, educationalmaterial, guidance on industry best practices).

Regulatory powers and tools assist the regulator in performing its regulatory duties andinfluencing the actions of the regulated entities. These include powers and tools which:

Enable the regulator to monitor plans to help identify plans that are at higher risk,for example through providing early warning signals.

Help the regulator change the behavior of plan administrators and sponsors, whichcan include educational tools such as best practice guidance as well as deterrencetools that deal with known instances of non-compliance.

Powers which enable the regulator to monitor plans, particularly when the regulator indicatesthe reasons for monitoring and the risks being monitored, may also influence the behaviour ofadministrators since administrators know that their plans are being monitored.

The Framework is generally designed to be consistent with the powers of FSCO under thecurrent Pension Benefits Act and regulations.

In reviewing the Framework and processes used by peer regulators in other jurisdictions, it wasnoted that some have other powers and tools available to them that FSCO does not have. Someof these powers and tools are mentioned in this document and may be recommended for futurelegislative reform. Note, however, that FSCO does not have any authority to make legislativechanges, and therefore they are presented herein primarily for informational purposes.

The following diagram provides an overview of key regulatory tools for risk-based regulation.The proportionate nature of the tools is illustrated through the categories: Educate Monitor andDeter. For illustrative purposes, included are certain tools that currently do not exist and wouldrequire legislative change to bring about.



Figure 2.5

The use of many of the regulatory powers and tools will require coordination between theregulatory functions and other functions such as policy, legal, and enforcement.



2.6 Data Sources

The data obtained by FSCO through plan filings is broadly consistent with those of leading risk-based peer regulators. As such the Framework does not recommend wholesale changes to planfilings although certain enhancements are discussed in this document.

The Framework also recommends that additional information could be collected outside theplan filings to assist with monitoring risks within the broader risk universe. As well, should FSCOobtain legal powers to collect additional information, such information can be used within theFramework.

This section considers three categories of data source enhancement:A. Existing data that can be used in an enhanced manner.B. New data to consider collecting absent legislative changeC. New data that may be provided pursuant to legislative change

A. Existing Data That Can Be Used In an Enhanced MannerThis includes information that is currently collected or available in some form, which can, forexample, be used to enhance the risk indicator tool including:• Complaint information. A process is currently being implemented to track complaint

information and to categorize by severity. Metrics for tracking complaint information canbe used to facilitate risk indicator reporting.

• Unremitted contributions. Plan trustees notify FSCO when required contributions arenot made.

• Late Filings and Applications. Late filings are tracked in the system and can form part ofthe risk indicator reporting. Tracking of late applications may require enhancement to beused effectively as a risk indicator.

• Examinations. Examinations can be used to grade plans, particularly in risk areas wherelittle information is available on plan filings (e.g. administration and governance). Keyresults of examinations can be made available within the Pension Division systems.

• Audit Reports. FSCO receives audited financial statements for pension plans where anaudit is required. The audit results, including disclosures in the notes in financialstatements, can be used in the risk assessment process.



B. New Data to Consider Collecting Absent Legislative ChangeIndustry and Sponsor Intelligence. The Framework recommends that an intelligence process beestablished to monitor industry and sponsor risks.• Industry risks. Examples of data that can be monitored for industry risks include

forward looking (e.g. research reports on industry) and backward looking information(e.g. past insolvency rates by industry). Availability of data and cost considerations mayimpact the choice of sources of industry risk data.

• Sponsor risks. Risks for certain specific sponsors can be monitored. It would beimpractical to actively monitor all sponsors, and accordingly FSCO would focus on thesponsors of plans that have been designated as high risk through a detailed riskassessment. Examples of data sources include news alerts related to sponsors (e.g. newsaggregators such as Google news alerts and RSS feeds, subscription services such as DowJones Factiva). As well, where sponsors are public companies with issued debt, creditratings are typically readily available and these can be monitored. In certaincircumstances, for example when funding shortfalls are significant and there areconcerns about sponsor viability, FSCO may wish to acquire credit reports for privatelyheld companies.

External Scans and Monitoring for Emerging Trends and Risks. This would include informationthat would be used to refine and enhance the approach to risk-based regulation. A number ofsources may be used in combination, including ongoing interaction with the industry;participation in forums and communication with peer regulators; and scanning externalinformation and reports.

Additional Data Concerning Plans and Service Providers. While FSCO often obtains andrecords information identifying service providers to plans, FSCO could consider requiring thisinformation to be provided, for example via AIRs). This would allow FSCO to record, for all plans,the details of who provides investment advice and actuarial services, allowing this data to bemined if required (e.g. if FSCO wanted to know what plans a particular investment firm advises).This type of information should normally be available to the plan administrator as part of itsgovernance process of monitoring and overseeing its service providers.

C. Potential New Data Pursuant to Legislative ChangesThere are a number of areas where peer regulators obtain information on pension plans outsidethe regular filing process that FSCO could introduce, and which may require legislative change.Examples of such new data include:



• Notifiable events. These are predefined significant events that require reporting by planadministrators / sponsors, such as breaches of bank covenants, senior managementconvictions, sponsors moving outside the jurisdiction, and can be used as early warningsignals of potential problems.

• Whistleblower reports. These are reports of legislative breaches made by sponsors,administrators or plan advisors. Whistleblower obligations can be set out under the law.

• Governance / Risk Management Information. Other jurisdictions require pension plansto provide details of their governance arrangements or require external audits of riskmanagement processes.

• Other information that could be subject to an external assurance process. FSCO couldrequire disclosure of information such as related party transactions, conflicts of interest,and investment holdings outside quantitative limits, and could explore whether thiscould be provided through an external assurance process.



2.7 Process Overview

The following chart provides an overview of the regulatory process flow.

Figure 2.6

The cornerstone of the Regulatory Response Model is a Risk Indicator Tool (RIT) that usesincoming plan information as input. Initially, the RIT will use information on existing FSCOdatabases such as Annual Information Return (AIR), Actuarial Information Summary (AIS),Investment Information Summary (IIS), late filing information, plan size, plan type, late orunremitted contributions, plan demographics, whether collectively bargained, multi-jurisdictional, frequency and severity of complaints, as well as complexity of plan structure.

Inputs to this tool can be automated to the extent practical. Based on pre-defined algorithms,the RIT presents the outcome of various risk indicators in a “traffic light” format (illustrativeonly and subject to change), as shown on the next page, and it determines if a plan ortransaction requires further review.



Low risk

Potential risk – consider in conjunction with other risk indicatorswhether to forward to / obtain advice from the Tier 1 reviewprocess

High risk – consider using application of judgement whether toforward to / obtain advice from Tier 1 review process

N/A No data available / indicator not applicable to this plan

The remaining process is described as follows:

Other than for plans or transactions presenting no major risk factors, a Tier 1 reviewwould be performed2. The purpose of Tier 1 review is to assess risk in terms ofprobability and impact on the basis of pre-defined risk assessment criteria,supplemented by judgments in the light of the particular circumstances of a plan ortransaction. It then assigns the plan or transaction with a preliminary risk classification,into one of the four quadrants of the Regulatory Response Model as described inSection 2.1. The outcome of Tier 1 review is used to guide FSCO staff as to what type ofregulatory response should be undertaken.

A plan or transaction in the “high risk” classification (i.e., upper-right quadrant) wouldbe subject to a Tier 2 review. Based on the judgment of the Tier 1 reviewers, some plansor transactions in the “moderate risk” category (i.e., lower-right or upper-left quadrant)would also be subject to a Tier 2 review.

Where a Tier 2 review is required, a detailed risk assessment would be performed toconfirm the preliminary risk classification. If a “high risk” classification is confirmed, thespecific plan or transaction will be case-managed by a dedicated team of FSCO staffconsisting of a case manager, front-line pension officers as well as actuarial, investment,legal and/or other professional support. The case management teams conduct on-goingmonitoring of high risk plans and high risk transactions, which includes recommendingapproval of specific applications by the Superintendent, periodic risk assessments,

2 Applications that require Superintendent’s approval (e.g., wind-ups, asset transfers etc.) are routinely subject to astandard review for legislative and regulatory compliance, which forms part of the Tier 1 review process. Ifmaterial non-compliance is identified in a plan situation, the issue will be escalated to a Tier 2 review.



interactions with plan administrators and their advisors as well as regulatoryinterventions, if warranted.

Additional Tier 2 activities may include:

– On site examinations of pension plans linked to the risk assessment process.

– Management reporting on risk-based activities such as those relating to high riskplans, trends and significant issues.

– Intelligence process (e.g. reviewing news feeds, general industry data) to identifyareas of risk that can be used to update the risk indicators and be communicatedmore broadly as required. The intelligence process would also monitor internal datasuch as results of on-site examinations and risk assessments for trends and issues toensure these are identified and disseminated.



The Framework operates with ten key business processes that can be described as follows:

Table 2.3T

Business Process Summary Definition

Incoming Plan InformationThe receipt of plan information (filings, applications, complaints etc.), theinitial review for completeness and routing to the appropriate person / group

IntelligenceReview of external information (e.g. media reports) and internal information(e.g. outputs from risk assessments), and filtering to determine relevantinformation to disseminate

Risk Indicator ToolThe process by which risk indicators are determined and kept current, and anychanges made to the screening process

Routine ReviewThe review of routine applications, filings, complaints, approval/rejection ofapplications, and identification of higher risk items.

Tier 1 Review

Review to assess risk related to a plan or transaction, in terms of probabilityand impact as well as legislative and regulatory compliance, and to assign theplan or transaction into one of the four quadrants of the Regulatory ResponseModel.

Tier 2 ReviewConsists of:• Detailed risk assessment• Process by which high risk applications / plans / issues are case managed.

Examinations On site examinations of pension plans linked to the risk assessment process.

Management ReportingOversight by senior management through reporting on developments relatingto higher risk plans / issues, trends and key performance indicators

Quality Control and FrameworkMaintenance

Oversight of methodology of risk-based regulation including ensuring it isapplied appropriately and consistently through quality control processes and itis revised and updated appropriately

Education and EngagementProviding education internally and externally on the risk-based regulationapproach, including communication of expectations to stakeholders andsoliciting their feedback and input



3. Medium Term Strategy

The proposed Framework is a significant change to the way in which FSCO regulates pensionplans. The full implementation of the Framework will take time, and flexibility will need to bebuilt into transition plans as implementation is phased in.

To transition to the new Framework, the principal activities FSCO plans to carry out over thenext three years are:

Enhance existing risk-based processes, including integrating the monitoring and reviewof funding and investment risks, applying risk indicators such as late filings andstakeholder complaints for risk monitoring, and strengthening on-site examinations withfocus on administration and governance risks.

Enhance stakeholders’ understanding of FSCO’s risk-based approach through ongoingengagement including education and communication.

Establish quality control and maintenance process that includes the oversight andupdate of the risk-based methodology and application.



3.1 Framework Transition

FSCO will streamline its existing risk-based processes by integrating the monitoring and reviewof funding and investment risks. Focus will be placed on, but not limited to, the review ofappropriateness of actuarial assumptions and methods, contributions remittance, asset mixpolicy in relation to the liabilities of the plan, and the measurement of fund performancerelative to appropriate benchmarks.

In addition to the AIR, FSCO will introduce and implement e-filings of the IIS, PBGF and AIS tofacilitate the collection of data necessary for risk monitoring. It will use other evidence such aslate filings, stakeholder complaints, and news alerts, for risk monitoring and assessment.

Well governed pension plans are likely to be better administered, have greater awareness offinancial risk, and to represent better the interests of plan members. FSCO intends to strengthenits on-site examinations by placing focus on identifying instances of poor governance andadministration, and working with the administrators to address the shortcomings related totheir plans.

At the same time, FSCO will take steps to promote, on an industry-wide basis, the knowledgeand understanding of the governance requirements for pension plans (e.g., information sessionon CAPSA governance guidelines, best practices of well-governed plans).



3.2 Stakeholder Education and Engagement

A key element of risk-based regulation is the communication of the regulator’s expectations tostakeholders, including plan administrators, sponsors and their advisors, through ongoingengagement including education and communication.

There are two elements of education and communication:

Education and communication of the changes to the regulatory approach as FSCOexpands its application of risk-based regulation.

On-going communication of the outcome of risk-based regulation as it is applied.

Extensive consultations with stakeholders and the industry will be required during the period oftransition. Consultation activities could include:

Working collaboratively with stakeholders and the industry to design and develop acomprehensive risk-based regulation framework.

Providing information about the risk-based regulatory approach and how it is to beapplied to pension plans.

Communication with a broader public audience to ensure that the regulatory approachand its limitations are properly understood.

Ways in which ongoing education and communication may be achieved include:

Providing periodic reports on the outcome of risk-based activities to industry onregulated areas. Currently, FSCO provides annual reports on funding and investmentmonitoring activities. This will be expanded to include other risk monitoring activities.

Providing reports on the application of risk-based regulation in general includingaggregate risk profiles, common issues, cases escalated to enforcement, the use ofregulatory tools, PBGF claims information, etc.

Identifying areas of potential concern within the pension system, performing thematicreviews and reporting to the industry on the results.

Providing guidance to pension administrators and sponsors on a variety of areas,especially in regard to plan governance. This may be performed in conjunction withother pensions regulators (e.g. through CAPSA) or through FSCO initiatives.

Engaging in industry forums, conferences, and speaking engagements.

Encouraging a customer service approach to contact with pension plans which mayinclude more personal interaction (e.g. face to face meetings, telephone calls) in place ofwritten correspondence.



Providing regular updates through website postings, news releases, webinars, emailnewsletters on regulatory and policy developments, including key issues, emergingtrends, enforcement actions taken by FSCO.

Broadening the potential scope of on-site examinations, and ensuring linkage betweenexamination of plans and outputs from the risk assessment process.



3.3 Quality Control and Framework Maintenance

A key element of effective application of the Framework is recognizing that:

Its implementation is subject to human judgment and hence its application can vary.

Staff training to ensure common understanding of the risk-based regulatory approachand its application is essential.

Quality control procedures need to be put in place to ensure appropriate and consistentapplication.

Update of the Framework will be needed as the industry practices change, new risksemerge and priority of existing risks changes.

It is expected that the Quality Control and Framework Maintenance process will include thefollowing activities:

Setting benchmarks or key performance indicators to monitor and measure theeffectiveness of risk indicators in identifying higher risk plans, and modifying them asappropriate.

Maintaining the Framework including periodically revisiting and updating themethodology, risk definitions and assessment criteria.

Coordinating the identification of emerging or increasing risks and developingapproaches to address those risks (e.g. identifying areas for thematic reviews, providingguidance / training / updates to colleagues, recommending changes to the application ofthe Framework).

Ensuring, through leading initiatives or coordination / participation with others,appropriate communication and education to the industry regarding the risk-basedapproach and regulatory expectations.

Liaison with relevant IT groups to ensure that the system of risk-based regulation isappropriately supported by technology.

Maintaining network of strategic relationships within FSCO, the industry, national andinternational regulatory bodies.

Reporting to senior management on the status and effectiveness of risk-basedregulation.

These measures will be implemented once the Framework has become operational and as welearn more about the risk profile of the pension plan universe.



Appendix - Illustrations of Detailed Risk Assessment

For the purposes of this Appendix, we have assumed that a risk indicator tool with pre-definedalgorithms presents the outcome of various risk indicators in a “traffic light” format, as shownin Section 2.7.

Other than for a “low risk” situation, a Tier 1 review is performed to assign a plan or transactionwith a preliminary classification into one of the four quadrants of the Regulatory ResponseModel shown in Section 2.1. If the plan or transaction is classified in the “high risk” category(i.e., upper-right quadrant), it will be subject to a Tier 2 review. In addition, there may besituations where a Tier 2 review is warranted even for plans classified in the other quadrants. Inthe Tier 2 review process, a detailed risk assessment (DRA) would be performed to confirm therisk classification and to guide FSCO in determining the appropriate regulatory actions.

As part of the DRA process, FSCO may seek additional information to better assess the risks tothe pension plan. Request may be made directly to the administrator or the employer, but theinformation gathering process would be broad and dependent on the specific situation.

It should be noted that these examples have been provided purely for illustrative purposes andany resemblance to an existing registered pension plan is coincidental.



Example 1 – Plan A: Suppose the risk indicator tool presented the following results for

Plan A and that the Tier 1 review process gave a preliminary classification for Plan A to the“high risk” quadrant.

Plan A RegulatoryResponseModelClassification:

Risk Indicator Rating Notes

AIS Flags Solvency ratio 65%Late contributionsIIS Flags Performance below benchmark, A/L

mismatchLate filings History of late filings of IIS and FSComplaintsNon-complianceComplexity of planBenefit processing N/AAudit report N/AMultijurisdictional plan BC, AB, ON and QCPolicies and procedures N/AIndustry outlook Auto parts manufacturingMergers / acquisitions N/ASponsor insolvency Media alerts on potential CCAA

Detailed Risk Assessment

The plan would be subject to a Tier 2 review. The DRA takes into account the followinginformation.



Key Plan Data:

Benefit type Collectively bargained career average plan

Membership profile

- Active

- Retired

- Other

Number Avg Age / Service Avg Salary / Pension

350 46 / 16 $45,800 / $5,400

90 72 $4,700

130 41 $2,000

Market value of assets $12,533,000

Financials as of Dec 31,2009

Going-concern Solvency

Actuarial value of assets 14,417,000 12,363,000

Plan liabilities:

- Active

- Retired

- Other

- Total

9,161,000

4,244,000

1,158,000

14,563,000

63%

29%

8%

100%

12,996,000

4,887,000

1,626,000

19,509,000

67%

25%

8%

100%

Surplus (Deficit) (146,000) (7,146,000)

Contribution requirements Year 1 Year 2 Year 3

- Total normal cost

- Special payments

665,000

911,000

665,000

790,000

665,000

667,000

Through the DRA process, the following elements of the risk universe have been considered:

Risk Area Analysis / Commentary1. Funding Riska) Actuarial basis The actuarial basis used for both the going-concern and solvency

valuations are reasonableb) Plan size vs. Sponsor

sizeThe solvency liability of $19.5 million represents approximately 2% of thesponsoring company’s assets. And the deficit of $7.1 million represents0.7% of the company’s assets.The $7.1 million deficit does not appear to be a material amount relativeto the company’s recent cash flow and revenue figures. However, due tothe deterioration in business conditions, this may be an issue in the nearfuture.



Risk Area Analysis / Commentaryc) Sponsor size vs.

Contributionrequirements

The normal cost represents 4.2% of the company’s active payroll while thespecial payment represents 5.7% of payroll, for a total of close to 10%.However, the annual contribution requirement does not appear to be amaterial amount relative to the company’s recent cash flow and revenuefigures.

d) Other The plan sponsor is a subsidiary of an US-based parent. There does notseem to be any evidence that the parent company is in difficulty at thistime. The US parent is a public company and has a very large marketcapitalization. It is not known at this time if any parent companyguarantee exists should the Canadian subsidiary experience financialdifficulty. . FSCO should inquire into this matter further.

2. Investment Risk The pension fund has an asset mix target of 60% equity/40% fixed incomeand its actual asset mix is reasonably close to this. The assets aremanaged by Manager ABC in diversified pooled funds. It is invested in atraditional manner without the use of leverage or esoteric strategies.

a) Matching risk- Asset mix vs.

DemographicsThe current asset mix does not exhibit a material mismatch. Take action ifnecessary to ensure investment policy is reviewed in the event of materialplan changes (e.g. windup or partial windup). Monitor to ensure plan doesnot take on undue risk to try and close the windup deficit.

3. Administration Risk There has been no plan examination conducted for this plan, so there isno direct information on matters like staffing concerns, benefitprocessing, recordkeeping, etc.

a) Errors / complaints Levels of member complaints and resolution efforts are acceptable.

b) Multi-jurisdictionalplans

Multi-jurisdictional plan with members in BC, AB, ON and QC.

c) Late filings / errors infilings

There is a history of requests for filing extensions for the financialstatements and IIS. As well, there have been some instances of errors infilings, although it appears that all of these have been resolved.

d) Regulatory compliance No issues have been found.

4. Governance Risk There has been no plan examination conducted for this plan, so there isno direct information to assess governance risk.

a) Use of qualifiedoutsourced providersand oversight by theplan

No known issues with respect to the service providers engaged by theadministrator.

b) Incidence andnature of legislativebreaches

No known breaches.



Risk Area Analysis / Commentary5. Sponsor/Industry

Riska) Continuity / financial

strength of pensionplan sponsor

Due to media alerts on potential CCAA application, there are majorconcerns about the financial strength of the plan sponsor.Therefore, proactive monitoring is called for along with directinteraction/dialogue with the administrator/sponsor to ensure thatfunding requirements are met promptly and that investment ofpension fund is prudent in the circumstances.

b) Business outlook ofIndustry sector;industry reports

Plan sponsor’s business is in the auto sector. Outlook has improvedsince financial crisis in 2008. However, there continue to beconcerns about the economic recovery in general and the autosector in particular. The big 3 US automakers seem to havefavourable outlooks going forward – which would be a directbenefit to the auto sector.

c) General economicenvironment

Still have concerns about housing and employment situation,especially in the US. This likely will have direct impact on sponsor’sbusiness.

d) Mergers /acquisitions

No specific information about M&A activity, although this is viewedas a distinct possibility.

e) Incidence andnature of litigationagainst plan andsponsor

No media reports of any legal actions.

6. Other Mattersa) PBGF coverage Most if not all of the benefits provided are covered by the PBGF –

members’ accrued pensions are typically under the coverage limit.No benefit improvements within the last 3 years.

Conclusions and Actions

There is a risk of sponsor insolvency which would leave the plan with a windup deficit ofapproximately $7 million as of the last valuation date, December 31, 2009. The plan issignificantly underfunded on a solvency basis with a solvency funded ratio of approximately65%. However, because of the level of pensions, Ontario members would have most, if not all,of their pensions covered by the PBGF. The PBGF is exposed to a modest claim. There would bea risk to non-Ontario members of a 35% reduction in their benefits should the plan windupwithout any additional contributions by the sponsor.



Since the plan sponsor is up to date in remitting required contributions to the fund, theemphasis for FSCO is to ensure that the sponsor continue to make the required contributions tothe plan in a timely manner and to take further action should contributions become delinquent.

Staff should also engage in dialogue with the administrator and employer to better understandthe company business situation and to also communicate our concerns and remind the sponsorof his obligations under the PBA. Staff should also determine if possible whether the parentcompany intends to stand behind the pension obligations of the plan sponsor (its subsidiary).

The investments should also be closely monitored to ensure that no undue risks are taken bythe sponsor in an attempt to eliminate the deficiency.

Reclassify to the “Monitor” quadrant of the Regulatory Response Model:



Example 2 – Plan B: Suppose the risk indicator tool presented the following results for

Plan B and that the Tier 1 review process gave a preliminary classification for Plan B to the “highrisk” quadrant.

Plan B RegulatoryResponseModelClassification:


AIS Flags Solvency ratio 65%, very largesolvency deficiency, excludedbenefits

Late contributionsIIS Flags Performance concerns, derivatives,

alternative investments

Late filingsComplaintsNon-complianceComplexity of plan Public sector plan, fairly complex

employees from many employersBenefit processing N/AAudit report N/AMultijurisdictional planPolicies and procedures N/AIndustry outlookMergers / acquisitions N/ASponsor insolvency





Key Plan Data:

Plan type Large public sector plan.

Benefit type Collectively bargained final average plan, fully indexed

Membership profile

- Active

- Retired

- Other


25,000 45 / 11.0 $55,000

15,000 72 $13,000

4,000 46 $2,800

Market value of assets $47.8 billion

Financials as of December31, 2009

Going-concern Solvency

Actuarial value of assets $6.7 B 5.9B

Plan liabilities:

- Active

- Retired

- Other

- Total

3.9 B

2.7 B

0.2 B

$6.8 B

57%

40%

3%

100%

$3.6 B

2.6 B

0.1B

$6.3 B

57%

41%

2%

100%

Surplus (Deficit) $(0.1) B $(0.4) B

Contribution requirements Year 1 Year 2 Year 3

- Total normal cost

- Special payments

275,000,000

3,000,000

287,000,000

13,000,000

300,000,000

14,000,000


Risk Area Analysis / Commentary1. Funding Riska) Actuarial basis The actuarial basis used for the going-concern valuation is on the

aggressive end of the range. For the solvency valuation, they haveexcluded indexing benefits (excluded benefits from the solvency liabilitiesare $2.6 B). Additionally due to the large plan size and indexed pensions,the estimated annuity purchase price for pensions and deferred pensionshave been estimated to be the same as for a lump sum commuted valuecalculation – there is no definitive standard or practice how these shouldbe valued.

b) Plan size vs. Sponsorsize

For this plan, the participating employers are in the public sector and arelarge relative to the plan size.



Risk Area Analysis / Commentaryc) Sponsor size vs.

Contributionrequirements

The employer required contributions represent approximately 8% to 8.5%of payroll. Members are required to contribute an equal amount. Giventhe nature of the employers, there is no significant risk of an inability byemployers to make the required contributions.

d) Demographics The plan is comprised of a diverse mix of members in terms of earningsand service.

e) Other Given that the participating employers are in the public sector, there is avery low probability of a plan windup. For the same reason, there is a lowprobability that the employers will be unable to make the minimumrequired contributions under the PBA. We do not have information aboutthe impact on the plan if a participating employer ceases its participation.FSCO should research this.

2. Investment Risk The pension fund investments are considered very sophisticated, includingallocations to real estate, infrastructure and private equity. The initialsystem screen indicated a “risky” situation due to performance issues, useof derivatives and investment in alternative asset classes.

The level of complexity, volatility and potential liquidity are valid concernsfor this plan.

The current information we collect through financial statements and theIIS do not allow us to assess this plan very effectively due to the variedasset classes as well as the difficulty in determining appropriatebenchmarks for the non-traditional investments (e.g. infrastructure orprivate equity). The plan does have qualified investment professionals onstaff and has in place systems and processes for monitoring and assessingits investments. As well, the plan itself is audited annually and prepares areport which includes investment performance statistics and benchmarkstatistics. The annual audit includes an assessment of their internalcontrols and risk management processes and systems.

Although the asset mix is on the aggressive side (relative to the plandemographics) and the plan uses derivatives and other sophisticatedfinancial instruments, they have on staff investment professionals andhave established documented procedures for managing and monitoringtheir investments. As such, they appear to follow prudent investmentpractices.



Risk Area Analysis / Commentary3. Administration Risk There has been no plan examination conducted for this plan, so there is

no direct information on matters like staffing concerns, benefitprocessing, recordkeeping, etc. Nevertheless, the fact that anorganization exists with plan administration as one of its primary purposessuggests that the administration risk is low for this plan.

The plan maintains a website through which it can communicate with itsmembers and with other stakeholders.

a) Errors / complaints Levels of member complaints and resolution efforts are acceptable.b) Late filings / errors in

filingsNo material issues noted.

c) Regulatory compliance No issues have been noted.

4. Governance Risk There has been no plan examination conducted for this plan, so there isno direct information to assess governance risk.

However, they have a well-developed framework for plan governance andhave documented its governance structure and processes. The board ofdirectors has representation from both the employers and the members.The plan’s governance appears to be functioning effectively.

5. Sponsor/Industry Risk There is a very low probability of any issues related to sponsor risk (oremployer risk in this case) given that the participating employers are allpublic sector entities.


This plan was initially flagged as a “high risk” plan by the system based screening tool and theTier 1 review process. The primary reasons were the low transfer ratio, very large windupdeficiency, complexity of the plan and investment related concerns.

The detailed risk assessment undertaken in the Tier 2 review process indicates that there is avery low probability of plan failure and that the issues related to plan complexity andinvestments are being managed effectively by the plan administrator. Nevertheless, due to thelarge number of plan members and the high profile nature of the plan, any significant negativeevent affecting the plan would potentially cause a concern and affect a large number ofindividuals. Therefore, it would be prudent to re-classify this plan to be in the “ProactiveSupervision” quadrant and take steps to be aware of issues concerning the plan on a timelybasis.



The plan is currently in full compliance with the PBA and FSCO should focus on being up-to-dateabout the plan’s circumstances through regular periodic monitoring efforts.



Example 3 – Plan C: In this example, a pension plan is being terminated and there is an

application to wind-up the plan. The risk indicator tool and Tier 1 review classifies this as a highrisk transaction to be reviewed in Tier 2.

Plan C RegulatoryResponseModelClassification:


AIS Flags Transfer ratio 55%, large solvencydeficiency of $130 million

Late contributions Contributions are up-to-dateIIS Flags N/A

Late filings N/AComplaintsNon-compliance N/AComplexity of plan Moderate complexity, different

classes of employees get differentbenefits

Benefit processing N/AAudit report N/AMultijurisdictional planPolicies and procedures N/AIndustry outlook Steel industry, currently in down

cycleMergers / acquisitions N/ASponsor insolvency



The plan sponsor’s business is in the steel industry. The industry appears to be at a low point inthe business cycle with media reports of shrinking global demand and a poor outlook over thenext 12 – 18 months. The company is also undergoing a major restructuring effort which



includes a significant downsizing. As part of its restructuring plan, the company is winding upthe pension plan. The windup report as at December 31, 2010 provides the followinginformation:

Key Plan Data:

Plan type Single employer

Benefit type Collectively bargained flat benefit plan with generous earlyretirement provisions

Membership profile

- Active

- Retired

- Other


800 45 / 16.3 $16,800

500 61 $24,800

100 47 $3,300

Market value of assets $170.0 million

Financials as of December31, 2010

Going-concern Wind-Up

Actuarial value of assets Not relevant 169.8 M (net of expenses)

Plan liabilities:

- Active

- Retired

- Other

- Total

n/a

n/a

n/a

n/a

$150.2 M

156.0 M

10.9 M

317.1 M

47%

49%

4%

100%

Surplus (Deficit) n/a $(147.3) M

Contribution requirements

- Special paymentsover 5 years

30.1 M per year




Risk Area Analysis / Commentary1. Funding Riska) Actuarial basis The windup basis is in accordance with prescribed requirements.b) Plan size vs. Sponsor

sizeThe windup deficit of $147.3 million is a significant amount for thesponsor, especially given the current business difficulties.

c) Sponsor size vs.Contributionrequirements

The minimum amount if funded over 5 years is $30.1 million per year.Under normal business conditions, it appears that a $30.1 million cashcontribution requirement would be manageable. The normal cost fromthe prior valuation was $3.5 million. Given the difficulties faced by thesponsor and also the business conditions faced by the steel industry, thereis a significant funding risk of the sponsor not making the requiredcontributions or not being able to fully fund the deficit within 5 years.

2. Investment Risk The pension fund investments are broadly diversified and managed byinvestment professionals. There are significant allocations to equities,both domestic and foreign, which represent approximately 70% of thetotal portfolio.

Due to the windup, there is a significant mismatch risk between how theliabilities are determined versus the assets backing them. Going-concernscenarios are irrelevant and the focus should be on windup and how tofully fund the windup deficit.

3. Administration Risk There has been no plan examination conducted for this plan, so there isno direct information on matters like staffing concerns, benefitprocessing, recordkeeping, etc. Given that a windup is intended, somereview of benefit processing accuracy and recordkeeping practices wouldbe advisable. There have been no unusual levels of member complaintslogged and plan filings have been received on time.

4. Governance Risk There has been no plan examination conducted for this plan, so there isno direct information to assess governance risk. The activities to finish thewindup and settle benefits will likely be delegated to a service provider.

5. Sponsor/Industry Risk There is a possibility that the plan sponsor could become insolvent beforefully funding the windup deficit.

6. Other Risksa) PBGF Coverage The average pension to retired members is more than double the amount

covered by the PBGF and the average accrued pension for active membersis about 40% higher than the PBGF covered amount. Therefore if thesponsor does not fully fund the windup deficit then there could be a largereduction to members’ pensions. In addition, there is a large potentialexposure for the PBGF.




This transaction was initially flagged as a “high risk” transaction by the system based screeningtool. The primary reasons were the low wind up funded ratio, very large windup deficit, and thenegative business/industry outlook.

The plan is significantly underfunded on a windup basis with a windup funded ratio ofapproximately 54%. There is a risk of sponsor insolvency which would leave the plan with awindup deficit of approximately $147 million as of December 31, 2010. Furthermore, the levelof pensions indicates that members would be at risk of substantial reductions since a significantpercentage of their pensions exceed the PBGF limit.

Of concern is the investment risk (primarily matching risk) and FSCO should take whatevermeasures it can to minimize the investment risk in the plan. This includes discussions with theadministrator about restructuring the investment portfolio to more closely match the liabilitiesof the plan.

Another risk that FSCO can try to manage is the funding risk associated with late or unremittedcontributions. FSCO should ensure that the sponsor continues to make the requiredcontributions to the plan for funding the windup deficit within the prescribed timelines. Promptaction should be undertaken if non-compliance is identified.

The “high risk” classification for this transaction is confirmed. A dedicated team is establishedto manage the wind up of the plan.

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